ARC’s NPV analysis (diluted for future funding) points to a potential value of 18 cents per share, four times Blackham’s current share price.
ARC believes the current heavy market discount to NPV should erode as Blackham further demonstrates that last year’s production challenges are firmly behind it through future operational results delivering against targets.
The following is an extract from ARC’s institutional research note:
Having successfully consolidated and re-established production on one of Australia’s most prolific goldfields, Blackham is now well set to progress the next phase of growth from its 6.7 million ounces Wiluna portfolio.
A 2017 PFS demonstrated the merits of expanding into the higher-grade sulphides (70% of resources) and developing refractory processing capacity to increase overall gold production from the current 80-90,000 ounces per annum rate (all free-milling) to over 200,000 ounces per annum.
Potentially deliverable for a modest capital outlay of just $114 million, this could see AISC lowered to cUS$800/ounce and margins widened to 35-40%.
Year-on-year resource growth through acquisition and drilling
Moreover, with oxide reserve additions, current free-milling operations could be extended, pushing combined post-expansion production closer to 250,000 ounces per annum.
Yet Blackham’s shares are trading at a heavy discount to peers (2.4x forecast FY2019 cash margin and US$34/ounce reserve, vs sector averages of 5.5x and US$339/ounce), a hangover from production and financing challenges in 2017.
With operations now stabilised and near-term balance sheet pressures alleviated, we feel this mispricing offers a compelling entry point.
The Wiluna processing plant has been refurbished by Blackham
Our 18 cents per share diluted sum-of-parts valuation points to 4x upside.
And with scope for further optimisation and mine-life extension beyond that considered in our model, upside may be greater still.
Achieving operational targets, growing the free-milling inventory and completing expansion study work should kick-start an upwards re-rating, in our view, paving the way for funding and development of the expansion to more fully unlock Wiluna’s undoubted potential.